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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File: Number 001-35980
 
NANOSTRING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-0094687
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
530 Fairview Avenue North
Seattle, Washington 98109
(Address of principal executive offices)
(206) 378-6266
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
NSTG
The NASDAQ Stock Market LLC
(The NASDAQ Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 29, 2019 there were 35,444,042 shares of registrant’s common stock outstanding.
 


Table of Contents

NANOSTRING TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019
TABLE OF CONTENTS

 
 
PAGE
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Loss — Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Changes in Stockholders' Equity — Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2019 and 2018
 
 

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Table of Contents


PART 1. FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements
NanoString Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
33,371

 
$
24,356

Short-term investments
112,109

 
69,641

Accounts receivable, net
18,999

 
17,279

Inventory, net
16,470

 
13,173

Prepaid expenses and other
9,168

 
7,258

Total current assets
190,117

 
131,707

Property and equipment, net
14,713

 
15,171

Operating lease right-of-use assets
25,889

 

Other assets
2,181

 
680

Total assets
$
232,900

 
$
147,558

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,132

 
$
8,636

Accrued liabilities
3,703

 
3,705

Accrued compensation and other employee benefits
9,749

 
12,060

Customer deposits
7,369

 
8,167

Deferred revenue, current portion
6,033

 
9,890

Deferred rent, current portion

 
657

Operating lease liabilities, current portion
3,517

 

Total current liabilities
36,503

 
43,115

Deferred revenue, net of current portion
853

 
1,620

Deferred rent and other long-term liabilities, net of current portion
170

 
7,558

Long-term debt, net of discounts
78,442

 
58,396

Operating lease liabilities, net of current portion
30,944

 

Total liabilities
146,912

 
110,689

Commitment and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 15,000 shares authorized; none issued

 

Common stock, $0.0001 par value, 150,000 shares authorized; 35,367 and 30,913 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
4

 
3

Additional paid-in capital
518,971

 
428,162

Accumulated other comprehensive income (loss)
204

 
(40
)
Accumulated deficit
(433,191
)
 
(391,256
)
Total stockholders’ equity
85,988

 
36,869

Total liabilities and stockholders’ equity
$
232,900

 
$
147,558


The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Product and service
$
22,370

 
$
20,384

 
$
43,720

 
$
38,429

Collaboration
7,975

 
4,615

 
14,313

 
9,655

Total revenue
30,345

 
24,999

 
58,033

 
48,084

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and service revenue
9,605

 
8,552

 
18,314

 
16,247

Research and development
17,029

 
14,585

 
33,056

 
28,417

Selling, general and administrative
22,499

 
20,649

 
45,935

 
40,086

Total costs and expenses
49,133

 
43,786

 
97,305

 
84,750

Loss from operations
(18,788
)
 
(18,787
)
 
(39,272
)
 
(36,666
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
828

 
204

 
1,351

 
442

Interest expense
(1,889
)
 
(1,604
)
 
(3,637
)
 
(3,167
)
Other expense, net
(120
)
 
(349
)
 
(230
)
 
(284
)
Total other expense, net
(1,181
)
 
(1,749
)
 
(2,516
)
 
(3,009
)
Net loss before provision for income tax
(19,969
)
 
(20,536
)
 
(41,788
)
 
(39,675
)
Provision for income tax
(68
)
 
(65
)
 
(147
)
 
(128
)
Net loss
$
(20,037
)
 
$
(20,601
)
 
$
(41,935
)
 
$
(39,803
)
Net loss per share - basic and diluted
$
(0.57
)
 
$
(0.80
)
 
$
(1.26
)
 
$
(1.55
)
Weighted average shares used in computing basic and diluted net loss per share
35,174

 
25,757

 
33,382

 
25,619

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(20,037
)
 
$
(20,601
)
 
$
(41,935
)
 
$
(39,803
)
Change in unrealized gain on short-term investments
183

 
46

 
244

 
33

Comprehensive loss
$
(19,854
)
 
$
(20,555
)
 
$
(41,691
)
 
$
(39,770
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2018
25,421

 
$
2

 
$
353,308

 
$
(99
)
 
(313,102
)
 
$
40,109

Cumulative effect of a change in accounting policy(1)

 

 

 

 
(754
)
 
(754
)
Warrants issued for common stock

 

 
748

 

 

 
748

Common stock issued for stock options and restricted stock units
139

 

 
411

 

 

 
411

Common stock issued for employee stock purchase plan
136

 

 
767

 

 

 
767

Stock-based compensation

 

 
2,945

 

 

 
2,945

Net loss

 

 

 

 
(19,202
)
 
(19,202
)
Other comprehensive loss

 

 

 
(13
)
 

 
(13
)
Balance at March 31, 2018
25,696

 
$
2

 
$
358,179

 
$
(112
)
 
$
(333,058
)
 
$
25,011

Warrants issued for common stock

 

 
675

 

 

 
675

Common stock issued for stock options and restricted stock units
89

 
1

 
583

 

 

 
584

Stock-based compensation

 

 
2,903

 

 

 
2,903

Net loss

 

 

 

 
(20,601
)
 
(20,601
)
Other comprehensive income

 

 

 
46

 

 
46

Balance at June 30, 2018
$
25,785

 
$
3

 
$
362,340

 
$
(66
)
 
$
(353,659
)
 
$
8,618

 
(1) Effective January 1, 2018, we adopted Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers. See Note 2. Significant Accounting Policies and Note 3. Revenue from Contracts with Customers for more information.
 


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NanoString Technologies, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (continued)
(in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2019
30,913

 
$
3

 
$
428,162

 
$
(40
)
 
(391,256
)
 
$
36,869

Common stock issued in public offering, net of $4.7 million of issuance costs
3,175

 

 
68,273

 

 

 
68,273

Warrants issued for common stock

 

 
698

 

 

 
698

Common stock issued for stock options and restricted stock units
805

 

 
8,075

 

 

 
8,075

Common stock issued for employee stock purchase plan
151

 

 
939

 

 

 
939

Tax payments from shares withheld for equity awards

 

 
(1,299
)
 

 

 
(1,299
)
Stock-based compensation

 

 
2,882

 

 

 
2,882

Net loss

 

 

 

 
(21,898
)
 
(21,898
)
Other comprehensive income

 

 

 
61

 

 
61

Balance at March 31, 2019
35,044

 
$
3

 
$
507,730

 
$
21

 
$
(413,154
)
 
$
94,600

Warrants issued for common stock

 

 
1,575

 

 

 
1,575

Common stock issued for stock options and restricted stock units
323

 
1

 
4,590

 

 

 
4,591

Stock-based compensation

 

 
5,076

 

 

 
5,076

Net loss

 

 

 

 
(20,037
)
 
(20,037
)
Other comprehensive income

 

 

 
183

 

 
183

Balance at June 30, 2019
35,367

 
$
4

 
$
518,971

 
$
204

 
$
(433,191
)
 
$
85,988


The accompanying notes are an integral part of these condensed consolidated financial statements.

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NanoString Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(41,935
)
 
$
(39,803
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Stock-based compensation expense
7,958

 
5,848

Depreciation and amortization
2,377

 
1,970

Non-cash operating lease cost
1,332

 

Amortization of premium on short-term investments
236

 
36

Amortization of deferred financing costs
343

 
180

Conversion of accrued interest to long-term debt
941

 
747

Provision for bad debts
38

 
445

Provision for inventory obsolescence
554

 
45

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,752
)
 
1,727

Inventory
(4,361
)
 
1,636

Prepaid expenses and other assets
(3,488
)
 
(1,317
)
Accounts payable
(2,551
)
 
1,127

Accrued liabilities
(200
)
 
(501
)
Accrued compensation and other employee benefits
(2,306
)
 
(621
)
Customer deposits
(798
)
 
557

Deferred revenue
(4,624
)
 
(145
)
Operating lease liabilities
(920
)
 

Deferred rent and other liabilities

 
(254
)
Net cash used in operating activities
(49,156
)
 
(28,323
)
Investing activities
 
 
 
Purchases of property and equipment
(1,147
)
 
(1,732
)
Proceeds from sale of short-term investments

 
5,410

Proceeds from maturity of short-term investments
60,120

 
25,600

Purchases of short-term investments
(102,579
)
 
(6,000
)
Net cash (used in) provided by investing activities
(43,606
)
 
23,278

Financing activities
 
 
 
Borrowings under long-term debt agreement
20,000

 

Deferred costs related to long-term debt
(100
)
 

Proceeds from sale of common stock, net
68,273

 

Proceeds from issuance of common stock warrants
1,306

 
1,423

Tax withholdings related to net share settlements of restricted stock units
(1,299
)
 
(108
)
Proceeds from issuance of common stock for employee stock purchase plan
939

 
767

Proceeds from exercise of stock options
12,665

 
994

Net cash provided by financing activities
101,784

 
3,076

Net increase (decrease) in cash, cash equivalents
9,022

 
(1,969
)
Effect of exchange rate changes on cash and cash equivalents
(7
)
 
(24
)
Cash and cash equivalents
 
 
 
Beginning of period
24,356

 
26,279

End of period
$
33,371

 
$
24,286

 
 
 
 
Supplemental disclosures
 
 
 
Operating lease right-of-use assets obtained in exchange for lease obligations
$
27,880

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

NanoString Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) 
1. Description of the Business
NanoString Technologies, Inc. (the “Company”) was incorporated in the state of Delaware on June 20, 2003. The Company’s headquarters is located in Seattle, Washington. The Company’s proprietary optical barcoding chemistry enables direct detection, identification and quantification of individual target molecules in a biological sample by attaching a unique color coded fluorescent reporter to each target molecule of interest. The Company markets its proprietary nCounter Analysis System, consisting of instruments and consumables and its Prosigna Breast Cancer Assay, to academic, government, biopharmaceutical and clinical laboratory customers.
The Company has incurred losses to date and expects to incur additional losses for the foreseeable future. The Company continues to invest the majority of its resources in the development and growth of its business, including significant investments in new product development and sales and marketing efforts. The Company’s activities have been financed primarily through the sale of equity securities and incurrence of indebtedness, cash received by the Company pursuant to certain product development collaborations, and, to a lesser extent, through the incurrence of other borrowings.
In March 2019, the Company completed an underwritten public offering of 5,175,000 shares of common stock, which included 2,500,000 shares issued and sold by the Company, 2,000,000 shares sold by a related party stockholder, and the exercise by the underwriter of an over-allotment option granted by the Company for 675,000 shares of common stock. The Company's total gross proceeds were $73.0 million. The Company did not receive any proceeds from the sale of shares of common stock by the related party stockholder. After underwriter’s commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $68.3 million.
In July 2018, the Company completed an underwritten public offering of 4,600,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock in August 2018, for total gross proceeds of $57.5 million. After underwriter’s commissions and other expenses of the offering, the Company’s aggregate net proceeds were approximately $53.8 million.
In January 2018, the Company entered into a Sales Agreement with a sales agent to sell shares of the Company's common stock through an “at the market” equity offering program for up to $40.0 million in gross cash proceeds. The Sales Agreement automatically terminates upon the issuance and sale of shares that provide gross proceeds of $40.0 million and may be terminated earlier by either the Company or the sales agent upon five days’ notice. In March 2019, the Company terminated this agreement and there were no shares of common stock sold under this agreement.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. The unaudited condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for annual financial statements. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and U.S. GAAP for unaudited condensed consolidated financial information. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and results of its operations as of and for the periods presented.
Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for per share and par value amounts.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of the Company’s operations for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or for any other period.

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Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product or service to the customer, meaning the customer has the ability to use and obtain the benefit of the product or service. The Company recognizes revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control.
The Company generates the majority of its revenue from the sale of products and services. The Company’s commercial products consist of its proprietary nCounter Analysis Systems and related consumables. Services consist of instrument service contracts and service fees for assay processing.
Revenue from instruments, consumables and in vitro diagnostic kits is recognized generally upon shipment to the end customer, which is when title of the product has been transferred to the customer. Performance obligations related to instrument sales are reviewed on a contract-by-contract basis, as individual contract terms may vary, and may include installation and calibration services. Performance obligations for consumable products are generally completed upon shipment to the customer. Instrument revenue related to installation and calibration services is recognized when the customer has possession of the instrument and the services have been performed. Such services can also be provided by the Company’s distribution partners and other third parties. For instruments sold solely to run Prosigna assays, training to the customer is a required performance obligation that must be provided by the Company prior to any revenue recognition related to the instrument sale.
Instrument service contracts are sold with contract terms ranging from 1236 months and cover periods after the end of the initial 12-month warranty. These contracts include services to maintain performance within the Company’s designed specifications and a minimum of one preventative maintenance service procedure during the contract term. Revenue from services to maintain designed specifications is considered a stand-ready obligation and recognized evenly over the contract term and service revenue related to preventative maintenance of instruments is recognized when the procedure is completed. Revenue from service fees for assay processing is recognized upon the rendering of the related performance obligation.
For arrangements with multiple performance obligations, the Company allocates the contract price in proportion to its stand-alone selling price. The Company uses its best estimate of stand-alone selling price for its products and services based on average selling prices over a 12-month period and reviews its stand-alone prices annually.
Product and service revenues from sales to customers through distributors are recognized consistent with the policies and practices for direct sales to customers, as described above.
The Company enters into collaboration agreements that may generate upfront fees, and in some cases subsequent milestone payments that may be earned upon completion of certain product development milestones or other designated activities. The Company estimates the expected total cost of product development and other services under these arrangements and recognizes collaboration revenue using a contingency-adjusted proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangements. Revenue recognized at any point in time is limited to cash received, amounts contractually due, or the amounts of any product development or other contractual milestone payments when achievement of a milestone is deemed to be probable. Changes in estimates of total expected collaboration product development or other costs are accounted for prospectively as a change in estimate. From period to period, collaboration revenue can fluctuate substantially based on the achievement or probable achievement of product development or other milestones, or as estimates of total expected collaboration product development or other costs are changed or updated. The Company may recognize revenue from collaboration agreements that do not include upfront or milestone-based payments. Amounts due to collaboration partners are recognized when the related activities have occurred and are classified in the statement of operations, generally as research and development expense, based on the nature of the related activities.

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Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to current year presentation.
Recently Adopted Accounting Pronouncements
In February 2018, FASB issued “ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other comprehensive income to retained earnings. The standard became effective for the Company beginning January 1, 2019, and did not have a material impact on its results of operations, financial condition, cash flows or financial statement disclosures, as the Company has not historically recorded the tax effects within accumulated other comprehensive income. The Company maintains a full valuation allowance for its net deferred tax assets.
Leases
In February 2016, FASB issued “ASU 2016-02, Leases – Recognition and Measurement of Financial Assets and Financial Liabilities.” The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. In August 2018, FASB issued “ASU 2018-11, Leases (Topic 842): Targeted Improvements,” which allows the cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
On January 1, 2019, the Company adopted ASU 2016-02 and has elected the optional modified transition method. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The adoption of the standard had a material impact on the Company’s condensed consolidated balance sheet as of March 31, 2019, but did not have a material impact on the Company’s condensed consolidated statements of operations or condensed consolidated statements of cash flows. Upon adoption, the Company recognized operating lease right-of-use assets, current and non-current operating lease liabilities, and derecognized current and non-current deferred rent liabilities, with no cumulative-effect adjustment to the opening balance of retained earnings.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allowed the carry forward of the historical lease classification and assessment of prior conclusions about lease identification. In addition, the Company elected, as an accounting policy election, to use the short-term lease recognition exemption on all classes of assets. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease at inception of a contract. The Company’s leasing portfolio is comprised of operating leases primarily for general office, manufacturing, and research and development purposes. Operating lease liabilities and the corresponding right-of-use assets are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease right-of-use asset is reduced by lease incentives included in the agreement. As the existing leases do not contain an implicit interest rate, the Company estimates its incremental borrowing rate based on information available at commencement date in determining the present value of future payments. The Company includes options to extend the lease in the lease liability and right-of-use asset when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For our short-term leases, we recognize lease payments as an expense on a straight-line basis over the lease term. See Note 4. Operating Leases for additional information regarding lease agreements.
Recent Accounting Pronouncements
In June 2016, FASB issued “ASU 2016-13, Financial Instruments: Credit Losses.” The standard requires disclosure regarding expected credit losses on financial instruments at each reporting date, and changes how other than temporary impairments on investment securities are recorded. The standard will become effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
In August 2018, FASB issued “ASU 2018-15, Intangibles — Goodwill and other — Internal-use software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will become effective for the Company beginning on January 1, 2020, with early adoption permitted. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

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In November 2018, the FASB issued “ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.” The new guidance clarifies when certain transactions between collaborative arrangement participants which should be accounted for as revenue under Topic 606. The standard will become effective for the Company beginning on January 1, 2020, with early adoption permitted. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
3. Revenue from Contracts with Customers
Disaggregated Revenues
The following table provides information about disaggregated revenue by major product line and primary geographic market (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
3,596

 
$
960

 
$
384

 
$
4,940

 
$
5,786

 
$
2,490

 
$
982

 
$
9,258

Consumables
8,193

 
2,800

 
781

 
11,774

 
16,368

 
6,044

 
1,508

 
23,920

In vitro diagnostic kits
647

 
1,866

 
101

 
2,614

 
1,076

 
3,679

 
173

 
4,928

Total product revenue
12,436

 
5,626

 
1,266

 
19,328

 
23,230

 
12,213

 
2,663

 
38,106

Service revenue
2,167

 
682

 
193

 
3,042

 
3,962

 
1,295

 
357

 
5,614

Total product and service revenue
14,603

 
6,308

 
1,459

 
22,370

 
27,192

 
13,508

 
3,020

 
43,720

Collaboration revenue
7,975

 

 

 
7,975

 
14,313

 

 

 
14,313

Total revenues
$
22,578

 
$
6,308

 
$
1,459

 
$
30,345

 
$
41,505

 
$
13,508

 
$
3,020

 
$
58,033

 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
 
Americas
 
Europe and Middle East
 
Asia Pacific
 
Total
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
3,131

 
$
1,555

 
$
802

 
$
5,488

 
$
5,817

 
$
3,040

 
$
1,305

 
$
10,162

Consumables
6,801

 
2,872

 
608

 
10,281

 
12,961

 
5,249

 
1,428

 
19,638

In vitro diagnostic kits
918

 
1,516

 
87

 
2,521

 
1,599

 
2,913

 
175

 
4,687

Total product revenue
10,850

 
5,943

 
1,497

 
18,290

 
20,377

 
11,202

 
2,908

 
34,487

Service revenue
1,540

 
449

 
105

 
2,094

 
2,801

 
948

 
193

 
3,942

Total product and service revenue
12,390

 
6,392

 
1,602

 
20,384

 
23,178

 
12,150

 
3,101

 
38,429

Collaboration revenue
4,615

 

 

 
4,615

 
9,655

 

 

 
9,655

Total revenues
$
17,005

 
$
6,392

 
$
1,602

 
$
24,999

 
$
32,833

 
$
12,150

 
$
3,101

 
$
48,084

Contract balances and remaining performance obligations
Contract liabilities are comprised of the current and long-term portions of deferred revenue of $6.9 million and $11.5 million as of June 30, 2019 and December 31, 2018, respectively, and customer deposits of $7.4 million and $8.2 million as of June 30, 2019 and December 31, 2018, respectively, included within the condensed consolidated balance sheets. Total contract liabilities decreased by $5.4 million for the six months ended June 30, 2019 as a result of the recognition of previously deferred revenue of $16.8 million for the completion of certain performance obligations during the period, partially offset by cash payments received of $11.4 million related to our collaborations and service contracts. The Company did not record any contract assets as of June 30, 2019.

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Unsatisfied or partially unsatisfied performance obligations related to collaboration agreements as of June 30, 2019 were $7.1 million and are expected to be completed over the period of each collaboration agreement, through December 2019. Performance obligations related to product and service contracts as of June 30, 2019 were $7.1 million and are expected to be completed over the term of the related contract, through February 2024.
4. Operating Leases
The Company maintains operating leases for its manufacturing, research and development and general operations with terms that expire from 2020 to 2030 and include renewal options to extend the lease term at the then current fair market rental for each of the lease agreements. None of the options to extend the rental term of existing leases were considered reasonably certain as of June 30, 2019. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.
The components of lease expense were as follows (in thousands):
 
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Operating lease cost
$
1,450

$
2,864

Other information related to leases was as follows (in thousands):
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
2,749

The lease term and discount rate was as follows:
 
June 30, 2019
Weighted Average Remaining Lease Term (years)
7.2

 
 
Weighted Average Discount Rate
7.1
%
Future minimum lease payments under the lease agreements as of June 30, 2019 were as follows (in thousands):
Remainder of 2019
$
2,751

2020
6,064

2021
6,202

2022
6,325

2023
6,504

Thereafter
17,765

Total future minimum lease payments
$
45,611

Less: imputed interest
(11,150
)
Total
$
34,461

Disclosures related to periods prior to adoption
Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows (in thousands):
2019
$
5,526

2020
5,560

2021
5,593

2022
5,708

2023
5,869

Thereafter
13,458

Total future minimum lease payments
$
41,714


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5. Net Loss Per Share
Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Outstanding stock options, restricted stock units and warrants have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. Accordingly, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same.
The following shares underlying outstanding options, restricted stock units and warrants were excluded from the computation of basic and diluted net loss per share for the periods presented (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Options to purchase common stock
4,765

 
5,525

 
4,801

 
5,595

Restricted stock units
1,641

 
1,193

 
1,578

 
1,106

Common stock warrants
1,013

 
468

 
960

 
413

6. Concentration of Risks
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash is invested in accordance with the Company’s investment policy, which includes guidelines intended to minimize and diversify credit risk. Most of the Company’s investments are not federally insured. The Company has credit risk related to the collectability of its accounts receivable. The Company performs initial and ongoing evaluations of its customers’ credit history or financial position and generally extends credit on account without collateral. The Company has not experienced significant credit losses to date.
During the three months ended June 30, 2019, the Company had two customer/collaborators, Lam Research Corporation (“Lam”) and Celgene Corporation (“Celgene”) that individually represented 14% and 12% of total revenue, respectively. The Company had one customer/collaborator, Lam, that individually represented 16% of total revenue during the six months ended June 30, 2019. The Company had one customer/collaborator, Lam, that individually represented 16% and 17% of total revenue during the three and six months ended June 30, 2018, respectively. The Company had no customers or collaborators that represented more than 10% of total product and service revenue for the three and six months ended June 30, 2019 and 2018, respectively. The Company had no customers or collaborators that represented more than 10% of total accounts receivable as of June 30, 2019 or December 31, 2018.
The Company is also subject to supply chain risks related to the outsourcing of the manufacturing and production of its instruments to sole suppliers. Although there are a limited number of manufacturers for instruments of this type, the Company believes that other suppliers could provide similar products on comparable terms. Similarly, the Company sources certain raw materials used in the manufacture of consumables from certain sole suppliers. A change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results.
7. Short-term Investments
Short-term investments consisted of available-for-sale securities as follows (in thousands):
Type of securities as of June 30, 2019
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
73,159

 
$
133

 
$

 
$
73,292

U.S. government-related debt securities
27,331

 
49

 

 
27,380

Asset-backed securities
11,414

 
23

 

 
11,437

Total available-for-sale securities
$
111,904

 
$
205

 
$

 
$
112,109

Type of securities as of December 31, 2018
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Corporate debt securities
$
47,299

 
$
1

 
$
(21
)
 
$
47,279

U.S. government-related debt securities
14,972

 

 
(11
)
 
14,961

Asset-backed securities
7,410

 

 
(9
)
 
7,401

Total available-for-sale securities
$
69,681

 
$
1

 
$
(41
)
 
$
69,641


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The fair values of available-for-sale securities by contractual maturity were as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Maturing in one year or less
$
104,059

 
$
69,641

Maturing in one to three years
8,050

 

Total available-for-sale securities
$
112,109

 
$
69,641

The Company has both the intent and ability to sell its available-for-sale investments maturing greater than one year within 12 months from the balance sheet date and, accordingly, has classified these securities as current in the condensed consolidated balance sheets.
8. Fair Value Measurements
The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The recorded amounts of certain financial instruments, including cash, accounts receivable, prepaid expenses and other, accounts payable and accrued liabilities, approximate fair value due to their relatively short-term maturities. The recorded amount of the Company’s long-term debt approximates fair value because the related interest rates approximate rates currently available to the Company.
The Company’s available-for-sale securities by level within the fair value hierarchy were as follows (in thousands):
As of June 30, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
8,141

 
$

 
$

 
$
8,141

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
73,292

 

 
73,292

U.S. government-related debt securities

 
27,380

 

 
27,380

Asset-backed securities

 
11,437

 

 
11,437

Total
$
8,141

 
$
112,109

 
$

 
$
120,250

 
 
 
 
 
 
 
 
As of December 31, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market fund
$
16,293

 
$

 
$

 
$
16,293

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities

 
47,279

 

 
47,279

U.S. government-related debt securities

 
14,961

 

 
14,961

Asset-backed securities

 
7,401

 

 
7,401

Total
$
16,293

 
$
69,641

 
$

 
$
85,934


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9. Inventory
Inventory consisted of the following as of the date indicated (in thousands):
 
June 30, 2019
 
December 31, 2018
Raw materials
$
4,886

 
$
3,408

Work in process
4,426

 
4,054

Finished goods
7,158

 
5,711

Total inventory
$
16,470

 
$
13,173

10. Long-term Debt
Term Loan Agreements
In April 2014, the Company entered into a term loan agreement (“2014 Term Loan”), under which it borrowed $45.0 million. Interest on the 2014 Term Loan accrued at an annual rate of 12.0%, payable quarterly, of which 3.0% can be deferred during the first six years of the term at the Company’s option and paid together with the principal at maturity. The 2014 Term Loan had an interest-only period through March 2021 and a final maturity date of March 2022.
In October 2018, the Company entered into an amended and restated term loan agreement (“2018 Term Loan”), under which it may borrow up to $100.0 million, which is due and payable in September 2024. At closing, the Company received net proceeds of approximately $7.8 million, pursuant to borrowings of $60.0 million under the new facility, net of repayment of the Company’s 2014 Term Loan of $50.4 million, including deferred interest and transaction-related fees and expenses. In June 2019, the Company borrowed an additional $20.0 million under the 2018 Term Loan and has the option to borrow the remaining $20.0 million until March 2020, which is subject to the achievement of annual revenue thresholds on or prior to December 31, 2019.
The term loan agreements involved multiple lenders who were considered members of a loan syndicate. In determining whether the most recent amendment was to be accounted for as a debt extinguishment or a debt modification, the Company considered whether lenders remained the same or changed. As all the lenders who were members of the loan syndicate changed as part of the amended and restated loan agreement, the 2014 Term Loan was extinguished, and the 2018 Term Loan was treated as a new borrowing. The extinguishment resulted in a loss of approximately $0.8 million for the year ended December 31, 2018, which was included in interest expense during the fourth quarter of 2018.
The 2018 Term Loan accrues interest at a rate of 10.5%, payable quarterly, of which 3.0% may be deferred during the six-year term at the Company’s option and repaid at maturity together with the principal. The Company paid an upfront fee of 0.5% of the aggregate principal amount of the initial borrowing under the 2018 Term Loan, and will pay a facility fee equal to 2.0% of the total amount borrowed including any deferred interest at the time the principal is repaid. A long-term liability of $1.9 million is being accreted using the effective interest method for the facility fee over the term of the 2018 Term Loan. Additional borrowings under the 2018 Term Loan will bear the same upfront and facility fees as the initial borrowing.
In connection with entry into the 2018 Term Loan, warrants to purchase an aggregate of 341,578 shares of common stock with an exercise price per share of $21.12 were issued to the lenders. In June 2019, in connection with the borrowing of an additional $20.0 million principal amount, warrants to purchase an aggregate of 128,932 shares of common stock with an exercise price per share of $34.20 were issued to the lenders. If additional amounts are borrowed under the 2018 Term Loan, additional warrants will be issued on each subsequent draw date for 0.3% of the fully-diluted shares then outstanding. The exercise price for additional warrants will be set at a 25.0% premium to the average closing trading price for the 30-day trading period as of the date immediately before the applicable draw date. The warrants issued in conjunction under the 2018 Term Loan were determined to be closely linked to the Company’s stock, and as such, were recorded as an equity security in additional paid-in capital at their relative fair value of $1.6 million and $1.0 million, in October 2018 and June 2019, respectively, with a corresponding debt discount recorded against the 2018 Term Loan balance outstanding.
Total borrowings and deferred interest under the 2018 Term Loan were $81.3 million and $60.4 million as of June 30, 2019 and December 31, 2018, respectively. The balance of the 2018 Term Loan as of June 30, 2019 and December 31, 2018 is net of discounts related to the warrants, debt issuance costs and other upfront fees of $2.9 million and $2.0 million, respectively.
The Company has the option to prepay the 2018 Term Loan, in whole or part, at any time subject to payment of a redemption fee of up to 4.0% during the first year of the term, 3.0% during the second year of the term and with no redemption fee payable if prepayment occurs after the second year of the loan.
Obligations under the 2018 Term Loan are collateralized by substantially all of the Company’s assets. The 2018 Term Loan contains customary conditions to borrowings, events of default and covenants, including negative covenants that could

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limit the Company’s ability to, among other things, incur additional indebtedness, liens or other encumbrances; make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. The 2018 Term Loan also includes a $2.0 million minimum liquidity covenant and minimum annual revenue-based financial covenants. If the Company’s actual revenue is below the minimum annual revenue requirement for any given year, it may avoid a related default by generating proceeds from an equity or subordinated debt issuance equal to the shortfall between its actual revenues and the minimum revenue requirement.
The Company incurred $1.9 million and $1.6 million of interest expense under the term loan agreements for the three months ended June 30, 2019 and 2018, respectively, and $3.6 million and $3.2 million for the six months ended June 30, 2019 and 2018, respectively. The Company was in compliance with its financial covenants under the term loan agreement as of June 30, 2019.
2018 Revolving Loan Facility
In January 2018, the Company entered into a $15.0 million secured revolving loan facility, with availability subject to a borrowing base consisting of eligible accounts receivable. In November 2018, the Company entered into an amended and restated loan and security agreement to increase the borrowing capacity under the facility to $20.0 million, amend the borrowing base to include finished goods inventory, and extend the final maturity under the facility to November 2021. As of June 30, 2019 and December 31, 2018, no amounts had been drawn on the facility.
Interest on borrowings is payable monthly and accrues at a yearly rate equal to the greater of (i) the prime rate as reported in the Wall Street Journal plus 0.50% and (ii) 4.75%. During an event of default, amounts drawn accrue interest at a yearly rate equal to 8.75%. Obligations under the agreement are secured by the Company’s cash and cash equivalents, accounts receivable and proceeds thereof, and inventory and proceeds from the sale thereof. The lender’s interest in the collateral under the loan facility is senior to the lender’s interest in such collateral under the term loan agreement. The loan facility contains various customary representations and warranties, conditions to borrowing, events of default, including cross default provisions with respect to the loan facility, and covenants, including financial covenants requiring the maintenance of minimum annual revenue and liquidity. The Company was in compliance with its financial covenants under the secured revolving loan facility as of June 30, 2019.
Long-term debt consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Borrowings under term loan agreements
$
80,000

 
$
60,000

Paid-in-kind interest on term loan agreements
1,341

 
400

Unamortized debt discounts
(2,899
)
 
(2,004
)
Long-term debt, net of discounts
$
78,442

 
$
58,396

Scheduled future principal payments for outstanding debt were as follows at June 30, 2019 (in thousands):
Years Ending December 31,
 
Remainder of 2019
$

2020

2021

2022

2023

Thereafter
81,341

 
$
81,341

11. Collaboration Agreements
At the time of entering into collaboration agreements, the Company evaluates the appropriate presentation and classification of payments within its consolidated financial statements based on the nature of the arrangement, the nature of its business operations and the contractual terms of the arrangement. The Company has determined that amounts to be received from collaborators in connection with its collaboration agreements entered into through June 30, 2019 are related to revenue generating activities.
The Company uses a contingency-adjusted proportional performance model to recognize revenue over the Company’s performance period for each collaboration agreement that includes up front, or milestone-based or other contractual payments.

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Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is a factor of and limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively in the period of change.
The Company recognizes revenue from collaboration agreements that do not include up front, milestone-based or other contractual payments when earned, which is generally in the same period that related costs are incurred. Amounts due to collaboration partners are recognized when the related activities have occurred and are classified in the statement of operations, generally as research and development expense, based on the nature of the related activities.
Lam Research Corporation
In August 2017, the Company entered into a collaboration agreement with Lam with respect to the development of the Company’s Hyb & Seq platform product candidate. Pursuant to the terms of the collaboration agreement, Lam will contribute up to an aggregate of $50.0 million, with amounts thereunder payable quarterly, to be applied to the research and development of the Company's Hyb & Seq platform, based on allowable development costs. Lam is eligible to receive certain single-digit percentage royalty payments from the Company on net sales of certain products and technologies developed under the collaboration agreement, if any such net sales are ever achieved. The maximum amount of royalties payable to Lam will be capped at an amount up to three times the amount of development funding actually provided by Lam. The Company retains exclusive rights to obtain regulatory approval, manufacture and commercialize the Hyb & Seq products. Lam participates in research and product development through a joint steering committee. The Company will reimburse Lam for the cost of up to 10 full-time Lam employees each year in accordance with the product development plan.
In connection with the execution of the collaboration agreement, the Company issued Lam a warrant to purchase up to 1.0 million shares of the Company’s common stock with the number of underlying shares exercisable at any time proportionate to the amount of the $50.0 million commitment that has been provided by Lam. The exercise price of the warrant is $16.75 per share, and the warrant will expire on the seventh anniversary of the issuance date. The warrant was determined to have a fair value of $6.7 million upon issuance, and such amount will be recorded as additional paid-in capital proportionately from the quarterly collaboration payments made by Lam.
During the three and six months ended June 30, 2019, the Company recognized revenue related to the Lam agreement of $4.4 million and $9.2 million, respectively, and $4.0 million and $8.2 million for the three and six months ended June 30, 2018, respectively. The Company received development funding of $5.5 million and $8.2 million related to the Lam collaboration for the three and six months ended June 30, 2019, respectively, and $7.9 million and $11.4 million for the three and six months ended June 30, 2018, respectively. At June 30, 2019, the Company had recorded $1.0 million of deferred revenue related to the Lam collaboration, all of which is estimated to be recognizable as revenue within one year. In addition, $5.9 million is included in customer deposits in the condensed consolidated balance sheet as of June 30, 2019, which represents amounts received in advance. The Company incurred costs related to services provided by Lam employees under the terms of the agreement of $0.3 million and $0.4 million during the three and six months ended June 30, 2019, respectively, and $0.1 million for the three and six months ended June 30, 2018. As of June 30, 2019, Lam had not exercised any warrants.
Celgene Corporation
In March 2014, the Company entered into a collaboration agreement with Celgene Corporation (“Celgene”) to develop, seek regulatory approval for, and commercialize a companion diagnostic using the nCounter Analysis System to identify a subset of patients with Diffuse Large B-Cell Lymphoma. In February 2018, the Company and Celgene entered into an amendment to their collaboration agreement in which Celgene agreed to provide the Company additional funding for work intended to enable a subtype and prognostic indication for the test being developed under the agreement for Celgene’s drug REVLIMID. In connection with this amendment, the Company agreed to remove the right to receive payments from Celgene in the event commercial sales of the companion diagnostic test do not exceed certain pre-specified minimum annual revenues during the first three years following regulatory approval. In addition, the amendment allows Celgene, at its election, to use trial samples with additional technologies for companion diagnostics.
Pursuant to the Company’s agreement as amended in February 2018, the Company is eligible to receive payments from Celgene totaling up to $24.8 million, of which $5.8 million was received as an upfront payment upon delivery of certain information to Celgene and $19.0 million is for development funding and potential success-based development and regulatory milestones. There have been several amendments to the collaboration agreement and in return the Company has received additional payments totaling $2.1 million.
The process of successfully developing a product candidate, obtaining regulatory approval and ultimately commercializing a product candidate is highly uncertain and the attainment of any additional milestones is therefore uncertain and difficult to predict. In addition, certain milestones are outside the Company’s control and are dependent on the performance

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of Celgene and the outcome of a clinical trial and related regulatory processes. Pursuant to its collaboration with Celgene, the Company has been developing an in vitro diagnostic test, LymphMark, as a potential companion diagnostic to aid in identifying patients with diffuse large B-cell lymphoma (DLBCL) for treatment. In April 2019, Celgene announced that the trial evaluating REVLIMID for the treatment of DLBCL did not meet its primary endpoint. In May 2019, the Company’s collaboration agreement with Celgene was terminated effective July 2019, with substantially all the remaining deferred revenue from the agreement recognized in the three months ended June 30, 2019. In addition, the Company does not intend to file a pre-market approval for LymphMark as a companion diagnostic for REVLIMID.
During the three and six months ended June 30, 2019, the Company recognized revenue related to the Celgene agreement of $3.1 million and $4.4 million, respectively. The Company recognized a reduction of cumulative revenue of $0.2 million during the six months ended June 30, 2018, due to higher cost estimates in future periods related to the expanded scope and the nature of the work to be performed in future periods. The Company received no development funding related to the Celgene collaboration during the three months ended June 30, 2019 and $0.2 million for the six months ended June 30, 2019.
Merck & Co., Inc.
In May 2015, the Company entered into a clinical research collaboration agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc. (“Merck”), to develop an assay intended to optimize immune-related gene expression signatures and evaluate the potential to predict benefit from Merck’s anti-PD-1 therapy, KEYTRUDA. Under the terms of the collaboration agreement, the Company received $3.9 million in payments during 2015. In connection with the execution of the development collaboration agreement, the Company and Merck terminated the May 2015 clinical research collaboration and moved all remaining activities under the related work plan to the new development collaboration agreement. In February 2016, the Company expanded its collaboration with Merck by entering into a new development collaboration agreement to clinically develop, seek regulatory approval for, and commercialize a companion diagnostic test to predict response to KEYTRUDA in multiple tumor types. During 2016, the Company received $12.0 million upfront as a technology access fee and $8.5 million of preclinical milestone payments. In October 2017, Merck notified the Company of its decision not to pursue regulatory approval of the companion diagnostic test for KEYTRUDA and, in August 2018, the Company and Merck agreed to mutually terminate their development collaboration agreement, effective as of September 30, 2018, following the completion of certain close-out activities. As part of the mutual termination agreement, Merck granted to the Company a non-exclusive license to certain intellectual property that relates to Merck’s tumor inflammation signature. The Company recognized revenue of $0.5 million and $1.4 million during the three and six months ended June 30, 2018, respectively.
12. Commitments and Contingencies
From time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Additionally, the Company operates in various states and local jurisdictions for which sales, occupation, or franchise taxes may be payable to certain taxing authorities. Management believes that there are no claims or actions pending against the Company currently, the ultimate disposition of which would have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
13. Information about Geographic Areas
The Company operates as a single reportable segment and enables customers to perform both research and clinical testing on its nCounter Analysis Systems. The Company has one sales force that sells these systems to both research and clinical testing labs, and certain of its nCounter reagents can be used for both research and diagnostic testing. In addition, the Company’s Prosigna Breast Cancer Assay is marketed to clinical laboratories.
The following table of total revenue is based on the geographic location of distributors or end users who purchase products and services and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end user. For collaboration agreements, revenues are derived from partners located primarily in the United States. Americas consists of the United States, Canada, Mexico and South America; and Asia Pacific includes Japan, China, South Korea, Singapore, Malaysia, India and Australia.

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Revenue by geography was as follows (in thousands):        
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Americas
$
22,578

 
$
17,005

 
$
41,505

 
$
32,833

Europe & Middle East
6,308

 
6,392

 
13,508

 
12,150

Asia Pacific
1,459

 
1,602

 
3,020

 
3,101

Total revenue
$
30,345

 
$
24,999

 
$
58,033

 
$
48,084

Total revenue in the United States was $22.3 million and $15.9 million for the three months ended June 30, 2019 and 2018, respectively, and $40.4 million and $30.8 million for the six months ended June 30, 2019 and 2018, respectively. The Company’s assets are primarily located in the United States and not allocated to any specific geographic region. Substantially all of the Company’s long-lived assets are located in the United States.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available. This section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements can be identified by words such as “believe,” “anticipate,” “could,” “continue,” “depends,” “expect,” “expand,” “forecast,” “intend,” “predict,” “plan,” “rely,” “should,” “will,” “may,” “seek,” or the negative of these terms and other similar expressions, although not all forward-looking statements contain these words. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:
our expectations regarding our future operating results and capital needs, including our expectations regarding instrument, consumable and total revenue, operating expenses, sufficiency of cash on hand and operating and net loss;
our ability to successfully launch and commercialize our Digital Spatial Profiling and Hyb & Seq platforms;
the success, costs and timing of implementation of our business model, strategic plans for our business and future product development plans;
the regulatory regime and our ability to secure and maintain regulatory clearance or approval or reimbursement for the clinical use of our products, domestically and internationally;
our ability to realize the potential payments set forth in our collaboration agreements;
our strategic relationships, including with patent holders of our technologies, manufacturers and distributors of our products, collaboration partners and third parties who conduct our clinical studies;
our intellectual property position;
our ability to attract and retain key scientific or management personnel;
our expectations regarding the competitive position, market size and growth potential for our business; and
our ability to sustain and manage growth, including our ability to expand our customer base, develop new products, enter new markets and hire and retain key personnel.
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. In this report, “we,” “our,” “us,” “NanoString,” and “the Company” refer to NanoString Technologies, Inc. and its subsidiaries.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

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Overview
We develop, manufacture and sell products that unlock scientifically valuable and clinically actionable information from minute amounts of biological material. Our core technology is a unique, proprietary optical barcoding chemistry that enables the labeling and counting of single molecules. This proprietary chemistry may reduce the number of steps required to conduct certain types of scientific experiments and allow for multiple experiments to be conducted at once. As a result, we are able to develop tools that are easier for researchers to use and that may generate faster and more consistent scientific results.
We use our technology to develop tools for scientific research, primarily in the fields of genomics and proteomics, and also to develop clinical diagnostic tests. We currently have one commercially available product platform, our nCounter Analysis System instruments and related consumables. We market and sell our instruments and related consumables to researchers in academic, government and biopharmaceutical laboratories for research use and to clinical laboratories and medical centers for diagnostic use, both through our direct sales force and through selected distributors in certain markets. As of June 30, 2019, we had an installed base of approximately 790 nCounter systems, which our customers have used to publish more than 2,650 peer-reviewed papers.
We derive a substantial majority of our revenue from the sale of our products, which consist of our nCounter instruments and related proprietary consumables. Our instruments are designed to work only with our consumable products. Accordingly, as the installed base of instruments grows, we expect recurring revenue from consumable sales to become an increasingly important driver of our operating results. Our consumables include our standardized panel products, custom codeset products that contain a specific set of targets for scientific analysis as requested by a customer, and our Prosigna breast cancer assay. We also derive revenue from processing fees related to proof-of-principle studies we conduct for potential customers and extended service contracts for our nCounter Analysis Systems. Additionally, we generate revenue through product development collaborations.
We use third-party contract manufacturers to produce the instruments comprising our nCounter Analysis System. We manufacture consumables at our Seattle, Washington facility.
We focus a substantial portion of our resources on developing new technologies, products and solutions. We invested $33.1 million and $28.4 million for the six months ended June 30, 2019 and 2018, respectively, in research and development and intend to continue to make significant investments in research and development.
We have discovered other novel applications that utilize our proprietary barcoding chemistry, and we have two new product platforms under development. Following completion of product development, each of these new product platforms is expected to be commercialized as a new instrument along with associated consumables.
The first new platform, our GeoMx Digital Spatial Profiling, or GeoMx DSP system, is designed to enable the field of spatial genomics. While nCounter and other existing technologies analyze gene activity as a whole throughout the totality of a biological sample, GeoMx DSP is used to analyze specifically selected regions of a biological sample in order to see how gene activity or protein levels might vary across those regions or in certain cell types. In advance of the launch of the commercial version of GeoMx DSP, we have provided early access to the system’s capabilities by offering selected customers the opportunity to send biological samples to our Seattle facility to be tested by us on prototype instruments. To date, we have conducted approximately 125 projects for 85 customers pursuant to this Technology Access Program, or TAP. In addition, in the third quarter of 2018 we announced the GeoMx Priority Site, or GPS, Program. The GPS Program was designed to provide customers the opportunity to be among the first to receive a GeoMx DSP instrument following its commercial launch. In April 2019, we announced the commercial launch of GeoMx DSP, with initial installations of commercial systems expected to commence during the third quarter of 2019. As a result of the GPS Program and other commercial sales activities conducted during the first half of 2019, as of June 30 2019 we have received approximately 55 orders for GeoMx DSP.
The second new platform, our Hyb & Seq molecular profiling system, is designed to use a modified version of our proprietary chemistry to determine and analyze gene sequences within a biological sample, or to potentially profile the activity of an even greater number of genes as compared to our nCounter Analysis System. Hyb & Seq is designed to determine gene sequences or analyze gene activity using a work flow with fewer steps as compared to currently available gene sequencing technologies. Hyb & Seq is expected to become commercially available during 2021.
Our product and service revenue increased 13.8% to $43.7 million for the six months ended June 30, 2019, compared to $38.4 million for the first six months of 2018. Our total revenue was $58.0 million for the six months ended June 30, 2019, compared to $48.1 million for the first six months of 2018. We have never been profitable and had net losses of $41.9 million and $39.8 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, our accumulated deficit was $433.2 million.

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Results of Operations
Revenue
Our product revenue consists of sales of our nCounter Analysis Systems and related consumables, including Prosigna in vitro diagnostic kits. Service revenue consists of fees associated with service contracts and conducting proof-of-principle studies, including programs in which we offer customers early access to technologies under development for which we generate data and perform analysis services on their behalf. Our customer base is primarily comprised of academic institutions, government laboratories, biopharmaceutical companies and clinical laboratories that perform analyses or testing using our nCounter Analysis Systems and purchase related consumables. Collaboration revenue is derived primarily from our collaboration with Lam and, historically, our terminated collaboration with Celgene.
The following table reflects total revenue by geography based on the geographic location of our customers, distributors and collaborators. For sales to distributors, their geographic location may be different from the geographic locations of the ultimate end customer.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Americas
$
22,578

 
$
17,005

 
33
 %
 
$
41,505

 
$
32,833

 
26
 %
Europe & Middle East
6,308

 
6,392

 
(1
)%
 
13,508

 
12,150

 
11
 %
Asia Pacific
1,459

 
1,602

 
(9
)%
 
3,020

 
3,101

 
(3
)%
Total revenue
$
30,345

 
$
24,999

 
21
 %
 
$
58,033

 
$
48,084

 
21
 %
The following table reflects the breakdown of our revenue into the primary components of our products, services, and collaborations.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Product revenue:
 
 
 
 
 
 
 
 
 
 
 
Instruments
$
4,940

 
$
5,488

 
(10
)%
 
$
9,258

 
$
10,162

 
(9
)%
Consumables
11,774

 
10,281

 
15
 %
 
23,920

 
19,638

 
22
 %
In vitro diagnostic kits
2,614

 
2,521

 
4
 %
 
4,928

 
4,687

 
5
 %
Total product revenue
19,328

 
18,290

 
6
 %
 
38,106

 
34,487

 
10
 %
Service revenue
3,042

 
2,094

 
45
 %
 
5,614

 
3,942

 
42
 %
Total product and service revenue
22,370

 
20,384

 
10
 %
 
43,720

 
38,429

 
14
 %
Collaboration revenue
7,975

 
4,615

 
73
 %
 
14,313

 
9,655

 
48
 %
Total revenue
$
30,345

 
$
24,999

 
21
 %
 
$
58,033

 
$
48,084

 
21
 %
Instrument revenue during the three and six months ended June 30, 2019 decreased modestly as compared to the same periods in 2018, due primarily to a decrease in the number of SPRINT instruments sold, partially offset by a shift in sales mix during the quarter to our MAX instruments, which generally have higher average selling prices as compared to our SPRINT instruments. Consumables revenue increased for the three and six months ended June 30, 2019, primarily as a result of our growing installed base of nCounter Analysis Systems, as well as growth in sales of our standardized panel consumable products. In vitro diagnostic kit revenue represents sales of Prosigna assays, which increased for the three and six months ended June 30, 2019 as more testing providers commenced providing services and testing volumes increased, most significantly in territories outside of the United States. Sales of Prosigna in North America were modestly lower in the three and six months ended June 30, 2019 as competitive pressures shifted market share in certain accounts. The increase in service revenue was related primarily to increases in revenue generated from technology access fees, particularly fees related to services offered pursuant to our GeoMx DSP Technology Access Program and, to a lesser extent, increases in the number of installed instruments covered by service contracts. Our product and service revenue may continue to increase in future periods as a result of our increased investments in sales and marketing activities, the growth in sales of our nCounter consumable products as driven by our increasing installed base of nCounter instruments and our standardized panel consumable products, the introduction of new nCounter consumable products, the continued sale of additional nCounter instruments and the commercial launch of our new GeoMx DSP product platform.

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Collaboration revenue increased for the three and six months ended June 30, 2019 as compared to the same periods in 2018, due primarily to changes in activity levels relating to our collaboration with Lam and, historically, our terminated collaboration with Celgene. In April 2019, Celgene announced that its clinical trial evaluating REVLIMID for the treatment of DLBCL, which was conducted using our companion diagnostic product candidate LymphMark, did not meet its primary endpoint. As a result of this outcome, our collaboration agreement with Celgene was terminated in July 2019, with substantially all the remaining deferred collaboration revenue recognized during the three months ended June 30, 2019. Our collaboration agreement with Lam represented $4.4 million and $9.2 million of our collaboration revenue for the three and six months ended June 30, 2019, respectively, and $4.0 million and $8.2 million for the three and six months ended June 30, 2018, respectively. As an offset to our anticipated expenses relating to the development of our Hyb & Seq platform, Lam has committed to provide up to $50.0 million in funding, of which $43.3 million has been received as of June 30, 2019.
Cost of Product and Service Revenue; Gross Profit; and Gross Margin
Cost of product and service revenue consists primarily of costs incurred in the production process, including costs of purchasing instruments from third-party contract manufacturers, consumable component materials and assembly labor and overhead, installation, warranty, service and packaging and delivery costs. In addition, cost of product and service revenue includes royalty costs for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and stock-based compensation expense. We provide a one-year warranty on each nCounter Analysis System sold and establish a reserve for warranty repairs based on historical warranty repair costs incurred.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(Dollars in thousands)
 
 
 
(Dollars in thousands)
 
 
Cost of product and service revenue
$
9,605

 
$
8,552

 
12
%
 
$
18,314

 
$
16,247

 
13
%
Product and service gross profit
$
12,765

 
$
11,832

 
8
%
 
$
25,406

 
$
22,182

 
15
%
Product and service gross margin
57
%
 
58
%
 
 
 
58
%
 
58
%
 
 
For the three and six months ended June 30, 2019, cost of product and service revenue increased as compared to the same periods in 2018, due primarily to higher volumes of consumables sold, increased volume of service contracts associated with our growing installed base of nCounter instruments and investments made to support the growth, installation and service of our product lines, including our GeoMx DSP product platform. Our gross margin on product and service revenue for the three and six months ended June 30, 2019 remained relatively flat as compared to the same periods in 2018. Gross margin during the period was impacted positively by our higher sales of consumables as a percentage of our sales mix, offset by investments made to support the growth of our business.
We expect our cost of product and service revenue to increase in future periods, primarily due to our expected growth in product and service revenue. We expect our gross margin on product and service revenue may fluctuate in future periods, depending upon our mix of instrument sales from which we typically record lower gross margins, as compared to our sales of consumable products or services, and potential expenses we may incur for regulatory compliance, quality assurance or related to the expansion of our manufacturing capacity. Costs related to collaboration revenue are included in research and development expense.
Research and Development Expense
Research and development expenses consist primarily of salaries and benefits, occupancy, laboratory supplies, engineering services, consulting fees, costs associated with licensing molecular diagnostics rights and clinical study expenses to support the regulatory approval or clearance of diagnostic products. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products and applications. We believe that our continued investment in research and development is essential to our long-term competitive position and expect these expenses to continue to increase in future periods. In particular, following our entry into the Lam collaboration in August 2017, which provides up to $50.0 million of funding for our Hyb & Seq program, we have experienced a significant increase in related research and development expenses.
Given the size of our research and development staff and the number of active projects at any given time, we have found that it has been effective for us to manage our research and development activities on a departmental basis. Accordingly, other than for collaborations and certain major technology development programs, we have neither required employees to report their time by project nor allocated our research and development costs to individual projects, other than collaborations. Research and development expense by functional area was as follows:

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Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Platform technology
$
7,994

 
$
5,852

 
37
 %
 
$
15,482

 
$
12,209

 
27
 %
Manufacturing process development
1,664

 
1,460

 
14
 %
 
2,895

 
2,278

 
27
 %
Life sciences products and applications
3,110

 
2,735

 
14
 %
 
5,784

 
5,150

 
12
 %
Diagnostic product development
1,267

 
1,977

 
(36
)%
 
3,201

 
3,344

 
(4
)%
Clinical, regulatory and medical affairs
1,326

 
1,167

 
14
 %
 
2,508

 
2,743

 
(9
)%
Facility allocation
1,668

 
1,394

 
20
 %
 
3,186

 
2,693

 
18
 %
Total research and development expense
$
17,029

 
$
14,585

 
17
 %
 
$
33,056

 
$
28,417

 
16
 %
The increase in research and development expense for the three and six months ended June 30, 2019 as compared to the same periods in 2018 is primarily attributable to an increase in staffing and personnel-related costs, including stock-based compensation expense, of $2.7 million and $4.2 million, respectively, as well as increased supply costs of $0.2 million and $1.0 million, respectively. These increases were partially offset by decreases in professional fees of $0.1 million and $0.8 million, respectively, and decreases in clinical trial costs of $0.6 million and $0.4 million, respectively, related to collaboration activities, as compared to the same periods in 2018.
We expect that research and development costs may continue to increase in future periods in support of remaining development activities relating to our GeoMx DSP and Hyb & Seq platforms. As an offset to the expected expenses relating to Hyb & Seq, Lam has committed to provide up to $50.0 million in funding, of which $43.3 million has been received as of June 30, 2019.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of costs for our sales and marketing, finance, human resources, information technology, business development, legal and general management functions, as well as professional fees for legal, consulting and accounting services. Our sales force includes roles which are focused mainly on sales of consumables to our existing instrument base, which enables our sales representatives to focus on instrument sales and support the growth of our installed instrument base. Legal, accounting and compliance costs have increased as a result of our being a public company, and we expect them to continue to increase as our business grows.
Selling, general and administrative expense was as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Selling, general and administrative expense
$
22,499

 
$
20,649

 
9
%
 
$
45,935

 
$
40,086

 
15
%

The increase in selling, general and administrative expense for the three and six month periods ended June 30, 2019 as compared to the same periods in 2018 is primarily attributable to an increased investment in personnel, including stock-based compensation expense, and commercial launch activities related to GeoMx DSP. These additional investments totaled $3.3 million and $5.5 million, respectively. For the three months ended June 30, 2019, these increases were partially offset by decreases in professional and consulting fees of $1.4 million, as compared to the same period in 2018 related to legal, consulting and other costs associated with activities supporting our compliance with the Sarbanes Oxley Act and other regulatory matters.
We expect selling, general and administrative expense to increase in future periods as the number of sales, technical support and marketing and administrative personnel grows to support the expected growth in our existing lines of business, as well as to support the introduction of new products and product platforms, including our new GeoMx DSP platform.

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Other Income (Expense)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
%
Change
 
2019
 
2018
 
%
Change
 
(In thousands)
 
 
 
(In thousands)
 
 
Interest income
$
828

 
$
204

 
306
 %
 
$
1,351

 
$
442

 
206
 %
Interest expense
(1,889
)
 
(1,604
)
 
18
 %
 
(3,637
)
 
(3,167
)
 
15
 %
Other expense, net
(120
)
 
(349
)
 
(66
)%
 
(230
)
 
(284
)
 
(19
)%
Total other expense, net
$
(1,181
)
 
$
(1,749
)
 
(32
)%
 
$
(2,516
)
 
$
(3,009
)
 
(16
)%
Interest expense increased for the three and six months ended June 30, 2019 due primarily to increased borrowings outstanding under our term loan agreement. The average balance of long-term debt outstanding for the six months ended June 30, 2019 and 2018 was $64.3 million and $49.7 million, respectively. The increases in interest expense were partially offset by increased interest income during the three and six months ended June 30, 2019 resulting from higher average cash and investment balances on hand during the periods as compared to the same periods in 2018.
Liquidity and Capital Resources
As of June 30, 2019, we had cash, cash equivalents and short-term investments of $145.5 million. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, we may need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. Our future funding requirements will depend on many factors, including: market acceptance and the level of sales of our existing products and new product candidates; the nature and timing of any additional research, product development or other partnerships or collaborations we may establish; the cost and timing of establishing additional sales, marketing and distribution capabilities; the cost of our research and development activities; the cost and timing of regulatory clearances or approvals; the effect of competing technological and market developments; and the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.
We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through partnership, collaboration or licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, delay or reduce the scope of or eliminate some or all of our research and development programs, delay development, launch activities or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize, or reduce marketing, customer support or other resources devoted to our products or cease operations.
Sources of Funds
Since inception, we have financed our operations primarily through the sale of equity securities and, to a lesser extent, from borrowings under term loan agreements. Our cash used in operations for the six months ended June 30, 2019 was $49.2 million, including $8.5 million in cash receipts from our collaboration agreements. The timing and amount of such receipts in the future are uncertain, and therefore we may be required to secure larger amounts of cash to fund our planned operations.
Equity Financings
In March 2019, we completed an underwritten public offering of 5,175,000 shares of common stock, which included 2,500,000 shares issued and sold by us, 2,000,000 shares sold by a related party stockholder, and the exercise in full by the underwriter of an over-allotment option we granted for 675,000 shares of common stock sold buy us. Our total gross proceeds were $73.0 million. We did not receive any proceeds from the sale of shares of common stock by the related party stockholder. After underwriter’s commissions and other expenses of the offering, and net of proceeds received by the related party stockholder, our aggregate net proceeds were approximately $68.3 million.
In July 2018, we completed an underwritten public offering of 4,600,000 shares of common stock, including the exercise in full by the underwriters of their option to purchase 600,000 additional shares of common stock in August 2018, for

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total gross proceeds of $57.5 million. After underwriter’s commissions and other expenses of the offering, our aggregate net proceeds were approximately $53.8 million.
In January 2018, we entered into a sales agreement with a sales agent to sell shares of our common stock through an “at the market” equity offering program for up to $40.0 million in gross cash proceeds. In March 2019, subsequent to our most recent underwritten public offering, we terminated this agreement. No shares of common stock were sold under this agreement.    
Debt Instruments
Term Loan Agreements
In April 2014, we entered into a term loan agreement, or the 2014 Term Loan, under which we borrowed $45.0 million. The 2014 Term Loan accrues interest at an annual rate of 12.0%, payable quarterly, of which 3.0% can be deferred during the first six years of the term at our option and paid together with the principal at maturity. The 2014 Term Loan had an interest-only period through March 2021 and a final maturity date of March 2022.
In October 2018, we entered into an amended and restated term loan agreement, or the 2018 Term Loan, under which we may borrow up to $100.0 million, with any amounts borrowed due and payable in September 2024. At closing, we received net proceeds of approximately $7.8 million, pursuant to borrowings of $60.0 million under the new facility, net of repayment of principal and interest outstanding under our prior term loan agreement of $50.4 million, including deferred interest and transaction-related fees and expenses. In June 2019, we borrowed an additional $20.0 million under the 2018 Term Loan, and have the option to borrow an additional $20.0 million until March 2020, with the remaining potential borrowings subject to the achievement of annual revenue thresholds on or prior to December 31, 2019.
The 2018 Term Loan accrues interest at a rate of 10.5%, payable quarterly, of which 3.0% may be deferred during the six-year term at our option and repaid at maturity together with the principal. We paid an upfront fee of 0.5% of the aggregate principal amount of the initial borrowing under the 2018 Term Loan, and will pay a facility fee equal to 2.0% of the total amount borrowed including any deferred interest at the time the principal is repaid. A long-term liability of $1.4 million is being accreted using the effective interest method for the facility fee over the term of the 2018 Term Loan. Additional borrowings under the 2018 Term Loan will bear the same upfront and facility fees as the initial borrowing.
In connection with entry into the 2018 Term Loan, warrants to purchase an aggregate of 341,578 shares of common stock with an exercise price per share of $21.12 were issued to the lenders. In June 2019, in connection with the borrowing of an additional $20.0 million principal amount, warrants to purchase an aggregate of 128,932 shares of common stock with an exercise price per share of $34.20 were issued to the lenders. If additional amounts are borrowed under the 2018 Term Loan, additional warrants will be issued on each subsequent draw date for 0.3% of the fully-diluted shares then outstanding. The exercise price for additional warrants will be set at a 25.0% premium to the average closing trading price for the 30-day trading period as of the date immediately before the applicable draw date. The warrants issued in conjunction under the 2018 Term Loan were determined to be closely linked to our common stock and, as such, were recorded as an equity security in additional paid-in capital at their relative fair value of $1.6 million and $1.0 million, in October 2018 and June 2019, respectively, with a corresponding debt discount recorded against the 2018 Term Loan balance outstanding.
Total borrowings and deferred interest under the 2018 Term Loan were $81.3 million and $60.4 million as of June 30, 2019 and December 31, 2018, respectively. The balance of the 2018 Term Loan as of June 30, 2019 and December 31, 2018 is net of discounts related to the warrants, debt issuance costs and other upfront fees of $2.9 million and $2.0 million, respectively.
We have the option to prepay the 2018 Term Loan, in whole or part, at any time subject to payment of a redemption fee of up to 4.0% during the first year of the term, 3.0% during the second year of the term and with no redemption fee payable if prepayment occurs after the second year of the loan.
Obligations under the 2018 Term Loan are collateralized by substantially all of our assets. The 2018 Term Loan contains customary conditions to borrowings, events of default and covenants, including negative covenants that could limit our ability to, among other things, incur additional indebtedness, liens or other encumbrances; make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. The 2018 Term Loan also includes a $2.0 million minimum liquidity covenant and minimum annual revenue-based financial covenants. If our actual revenue is below the minimum annual revenue requirement for any given year, we may avoid a related default by generating proceeds from an equity or subordinated debt issuance equal to the shortfall between our actual revenues and the minimum revenue requirement. We were in compliance with our financial covenants under the 2018 Term Loan agreement as of June 30, 2019.
2018 Revolving Loan Facility
In January 2018, we entered into a $15.0 million secured revolving loan facility, with availability subject to a borrowing base consisting of eligible accounts receivable. In November 2018, we entered into an amended and restated loan and security agreement to increase the borrowing capacity under the facility to $20.0 million, amend the borrowing base to

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include finished goods inventory, and extend the final maturity under the facility to November 2021. As of June 30, 2019 and December 31, 2018, no amounts had been drawn on the facility.
Interest on borrowings is payable monthly and accrues at a yearly rate equal to the greater of (i) the prime rate as reported in the Wall Street Journal plus 0.50%, and (ii) 4.75%. During an event of default, amounts drawn accrue interest at a yearly rate equal to 8.75%. Obligations under the agreement are secured by our cash and cash equivalents, accounts receivable and proceeds thereof, and inventory and proceeds from the sale thereof. The lender’s interest in the collateral under the loan facility is senior to the lender’s interest in such collateral under the term loan agreement. The loan facility contains various customary representations and warranties, conditions to borrowing, events of default, including cross default provisions with respect to the loan facility, and covenants, including financial covenants requiring the maintenance of minimum annual revenue and liquidity. We were in compliance with our financial covenants under the secured revolving loan facility as of June 30, 2019.
Use of Funds
Our principal uses of cash are funding our operations, capital expenditures, working capital requirements and satisfaction of any outstanding obligations under our revolving or term loan facilities, respectively. Over the past several years, our revenue has increased significantly from year to year and, as a result, our cash flows from customer collections have increased. However, our operating expenses have also increased as we have invested in our sales and marketing activities and in research and development of new product platforms and technologies that we believe have the potential to drive the long-term growth of our business.
Our operating cash requirements may increase in the future as we invest in research and development related to existing or new product platforms, including our nCounter and GeoMx DSP product platforms, as well as in sales and marketing activities to expand the installed base of our nCounter Analysis and GeoMx DSP Systems and related consumable usage. We cannot be certain our revenue will grow sufficiently to offset our operating expense increases, nor can we be certain that we will be successful in continuing to generate cash from new partnerships or collaborations to help fund our operations. As a result, we may need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.
Historical Cash Flow Trends
The following table shows a summary of our cash flows for the periods indicated (in thousands):
 
Six Months Ended
June 30,
 
2019
 
2018
Cash used in operating activities
$
(49,156
)
 
$
(28,323
)
Cash (used in) provided by investing activities
(43,606
)
 
23,278

Cash provided by financing activities
101,784

 
3,076

Operating Cash Flows
We derive operating cash flows from cash collected from the sale of our products and services and from collaborations. These cash flows received are currently offset by our use of cash for operating expenses to support the growth of our business. As a result, we have historically experienced negative cash flows from operating activities, with such negative cash flows likely continue for the foreseeable future.
For the six months ended June 30, 2019, net cash used in operating activities consisted of our net loss of $41.9 million, and net increases in our operating assets and liabilities of $21.0 million, partially offset by $13.8 million of net non-cash income and expense items, such as stock-based compensation, depreciation and amortization, amortization of our right-of-use assets, deferred interest converted to principal pursuant to our term loan agreement, and provisions for inventory obsolescence.
For the six months ended June 30, 2018, net cash used in operating activities consisted of our net loss of $39.8 million which was offset by $9.3 million of net non-cash items, such as stock-based compensation, depreciation and amortization, deferred interest converted to principal for the term loan, and provision for bad debts, as well as $2.2 million of net decreases in our operating assets and liabilities.
Investing Cash Flows
Our most significant investing activities for the six months ended June 30, 2019 and 2018 were related to the purchase, maturity and sale of short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents

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and short-term investments, we do not consider these cash flows to be important to an understanding of our liquidity and capital resources.
During the six month periods ended June 30, 2019 and 2018, we purchased property and equipment totaling $1.1 million and $1.7 million, respectively, which we believe will be required to support the growth and expansion of our operations.
Financing Cash Flows
Historically, we have funded our operations through the issuance of equity securities and debt borrowings.
Net cash provided by financing activities for the six months ended June 30, 2019 consisted of net proceeds of $68.3 million from an underwritten public offering of our common stock, borrowings of $20.0 million under our term loan agreement, and $12.3 million of net proceeds from the exercise of stock options and other equity awards and our Employee Stock Purchase Plan.
Net cash provided by financing activities for the six months ended June 30, 2018 consisted of net proceeds of $1.7 million from the exercise of stock options and other equity awards and our Employee Stock Purchase Plan and $1.4 million of proceeds from the issuance of common stock warrants.
Contractual Obligations and Commitments
Our future significant contractual obligations as of December 31, 2018 were reported in our Annual Report on Form 10-K, filed with the SEC on March 11, 2019.
As of June 30, 2019, there have been no material changes from the contractual commitments previously disclosed in the Annual Report on Form 10-K, other than an increase in long-term debt obligations pursuant to the borrowing in June 2019 of an additional $20.0 million pursuant to the terms of our existing term loan agreement, increases of approximately $6.7 million related to new office lease obligations entered into during the period, as well as fluctuations resulting from general working capital requirements.
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Critical accounting policies and significant estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to: 
revenue recognition;
stock-based compensation;
inventory valuation;
fair value measurements; and
income taxes.
There have been no material changes in our critical accounting policies and significant estimates in the preparation of our condensed consolidated financial statements for the six months ended June 30, 2019 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 11, 2019.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 of the Notes to the Condensed Consolidated Financial Statements under Item 1 of this report.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

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Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to various market risks, including changes in commodity prices and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Prices for our products are largely denominated in U.S. dollars and, as a result, we do not face significant risk with respect to foreign currency exchange rates.
Interest Rate Risk
Generally, our exposure to market risk has been primarily limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of interest-bearing instruments, which have included U.S. government and agency securities, high-grade U.S. corporate bonds, asset-backed securities, and money market funds. Declines in interest rates, however, would reduce future investment income. A 10% decline in interest rates, occurring on July 1, 2019 and sustained throughout the period ended June 30, 2020, would not be material.
As of June 30, 2019, the principal and deferred interest outstanding under our term borrowings was $81.3 million. The interest rates on our term borrowings under our credit facility are fixed. If overall interest rates had increased by 10% during the periods presented, our interest expense would not have been affected.
Foreign Currency Exchange Risk
As we continue to expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Historically, a majority of our revenue has been denominated in U.S. dollars, although we sell our products and services directly in certain markets outside of the United States denominated in local currency, principally the Euro. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. The effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows will be subject to potentially greater fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Item 4.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting, specifically with respect to certain information technology general controls (“ITGC's”), that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Remediation Efforts. As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we began implementing a remediation plan to address the material weaknesses mentioned above. The remediation actions include: (i) implementing an improved IT process and system for approving, monitoring and implementing IT changes to key systems which impact our financial reporting; (ii) implementing improved processes for requesting, authorizing, and reviewing user access to key systems which impact our financial reporting, including identifying access to roles where manual business process controls may be required; (iii) enhancing our training programs and documentation practices which address ITGCs and related policies; and (iv) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors. The material weaknesses will not be considered remediated until

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internal controls have been designed and implemented or redesigned which specifically address the material weaknesses, and these internal controls must operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Inherent limitation on the effectiveness of internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
We are not engaged in any material legal proceedings. From time to time, we may become involved in litigation relating to claims arising from the ordinary course of business. We believe that there are no claims or actions pending against us currently, the ultimate disposition of which would have a material adverse effect on our consolidated results of operation, financial condition or cash flows.
Item 1A.
Risk Factors.
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
Risks Related to Our Business and Strategy
We have incurred losses since we were formed and expect to incur losses in the future. We cannot be certain that we will achieve or sustain profitability.
We have incurred losses since we were formed and expect to incur losses in the future. We incurred net losses of $41.9 million and $39.8 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $433.2 million. We expect that our losses will continue for at least the next several years as we will be required to invest significant additional funds toward ongoing development and commercialization of our technology. We also expect that our operating expenses will continue to increase as we grow our business, but there can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we attain profitability, in the future. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including the market acceptance of our products, future product development and our market penetration and margins. We may never be able to generate sufficient revenue to achieve or sustain profitability.
Our financial results may vary significantly from quarter to quarter which may adversely affect our stock price.
Investors should consider our business and prospects in light of the risks and difficulties we expect to encounter in the new, uncertain and rapidly evolving markets in which we compete. Because these markets are new and evolving, predicting their future growth and size is difficult. We expect that our visibility into future sales of our products, including volumes, prices and product mix between instruments and consumables, and the amount and timing of payments pursuant to collaboration agreements will continue to be limited and could result in unexpected fluctuations in our quarterly and annual operating results.
Numerous other factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. In addition, these fluctuations may result in unanticipated changes in our available cash, which could negatively affect our business and prospects. Factors that may contribute to fluctuations in our operating results include many of the risks described in this section. Also, one or more of such factors may cause our revenue or operating expenses in one period to be disproportionately higher or lower relative to the others. Furthermore, our instruments involve a significant capital commitment by our customers and accordingly involve a lengthy sales cycle. We may expend significant effort in attempting to make a particular sale, which may be deferred by the customer or never occur. Accordingly, comparing our operating results on a

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period-to-period basis may not be meaningful, and investors should not rely on our past results as an indication of our future performance. If such fluctuations occur or if our operating results deviate from our expectations or the expectations of securities analysts, our stock price may be adversely affected. In addition, we have certain collaborations where our financial results may vary significantly if circumstances change. For example, in May 2019, we were notified that our collaboration agreement with Celgene was terminated effective July 2019 and resulted in the recognition of $3.1 million of collaboration revenue during the three months ended June 30, 2019.
If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects will be harmed.
We have experienced significant revenue growth in recent periods and we may not achieve similar growth rates in the future. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline. Furthermore, growth will place significant strains on our management and our operational and financial systems and processes. For example, the recent commercial launch of our GeoMx DSP is a key element of our growth strategy and will require us to hire and retain additional sales and marketing personnel and resources. If we do not successfully generate demand for our GeoMx DSP instrument, other new product offerings, or manage our anticipated expenses accordingly, our operating results will be harmed.
Our future success is dependent upon our ability to expand our customer base and introduce new applications and products.
Our current customer base is primarily composed of academic and government research laboratories, biopharmaceutical companies and clinical laboratories (including physician-owned laboratories) that perform analyses using our nCounter Analysis Systems. Our success will depend, in part, upon our ability to increase our market penetration among all of these customers and to expand our market by developing and marketing new research applications, new instruments, and new diagnostic products. During 2017, in an effort to enhance future results, we added sales staff focused on consumable sales to existing customers, enabling existing sales representatives to increase focus on instrument sales. We expect that increasing the installed base of our nCounter Analysis Systems will drive demand for our relatively high margin consumable products. If we are not able to successfully increase our installed base of nCounter Analysis Systems, sales of our consumable products and our margins may not meet expectations. Moreover, we must convince physicians and third-party payors that our diagnostic products, such as Prosigna, are cost effective in obtaining information that can help inform treatment decisions and that our nCounter Analysis Systems could enable an equivalent or superior approach that lessens reliance on centralized laboratories. In the U.S., Medicare and most private insurers provide coverage and payment for patients to be tested with Prosigna; however, other countries, such as Germany, provide more limited coverage and payment for Prosigna.
We also plan to develop and introduce new products which would be sold primarily to new customer types, such as our GeoMx DSP instrument for use in pathology labs and a sequencer based on our Hyb & Seq chemistry targeted for use by hospitals and oncology clinics. Our GeoMx DSP instrument became commercially available in 2019 and we anticipate that scaling and training our sales force to attract new customers will require substantial time and expense. Any failure to expand our existing customer base through the launch of our GeoMx DSP instrument, or other new applications and products would adversely affect our operating results.
Our research business depends on levels of research and development spending by academic and governmental research institutions and biopharmaceutical companies, a reduction in which could limit demand for our products and adversely affect our business and operating results.
In the near term, we expect that a large portion of our revenue will be derived from sales of our nCounter Analysis Systems to academic and government research laboratories and biopharmaceutical companies worldwide for research and development applications. The demand for our products will depend in part upon the research and development budgets of these customers, which are impacted by factors beyond our control, such as:
changes in government programs (such as the National Institutes of Health) that provide funding to research institutions and companies;
macroeconomic conditions and the political climate;
changes in the regulatory environment;
differences in budgetary cycles;
competitor product offerings or pricing;
market-driven pressures to consolidate operations and reduce costs; and
market acceptance of relatively new technologies, such as ours.
In addition, academic, governmental and other research institutions that fund research and development activities may

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be subject to stringent budgetary constraints that could result in spending reductions, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers to purchase our products. Our operating results may fluctuate substantially due to reductions and delays in research and develo